European stocks hit five year low

Elsewhere in Europe, the German government is working on a British-style rescue plan for its financial sector which could involve guarantees of over $137bn and a large injection of cash into the system.

A coalition party source confirmed a report in Die Welt newspaper which said the government was considering a comprehensive rescue plan based on the British model.

Financial guarantees

Belgium also announced a series of measures aimed at reinforcing its banks and returning market confidence.

The "temporary guarantee plan" aims to refinance Belgium banks which meet the government's criteria and is to last through October 2009, but "could be extended", the government said in a statement.

The Belgian government, alongside France and Luxembourg, has already stepped in twice to rescue struggling bank Dexia, pledging to guarantee money it borrows on the markets.

Fortis bank has also needed intervention from the Belgian and Dutch governments and the resale of some of its assets to BNP Paribas to stay in business.

As the financial turmoil deepened across Europe, the French presidency announced that European leaders would hold a financial crisis summit in Paris on Sunday to "define a joint action plan for the eurozone and the European Central Bank".

Frozen assets

Britain and Iceland have been locked in a dispute after the UK used anti-terrorism laws to freeze assets of Icelandic bank Landisbanki after British investors appeared likely to lose their savings amid Iceland's financial meltdown.

Some 300,000 private British savers reportedly have over $6.8bn in Icesave, a British subsidiary of Iceland's nationalised Landsbanki.

Local government and other organisations, including charities, have hundreds of millions of pounds invested in Icelandic banks.

Britain has been talking tough on the need for British investors to get their money back in recent days, but in a marked softening of tone on Friday, Gordon Brown, the British prime minister, told his Icelandic counterpart he hoped the two nations could resolve their clash over frozen savings as soon as possible.

Banking meltdown

"We very much hope that it will be possible to resolve this situation rapidly and on a constructive and co-operative basis," Brown wrote to Geir Haarde.

Panic-selling saw share prices tumble to their lowest close in more than five years [EPA]

Haarde told Britain's Channel Four television that Britain's initial reaction to the situation had been too strong.

"I think the initial reaction of the UK government was very out of proportion given what we had said here," he said.

"We do not sanction activity that is not in accordance with the law. If the law was broken, well then people have to be made responsible for that but as far as I'm aware no law was broken, but that needs to be investigated by the proper authorities."

Iceland's banking system has been in meltdown in recent days, with the country forced to nationalise its three biggest lenders this week.

Patchy response

Overall, Europe's response to the month-long stock market mayhem has been patchy, with various governments rushing to put out fires in their own countries rather than work on a trans-national plan for their interconnected economies.

Silvio Berlusconi, the Italian prime minister, said: "The stock markets are currently in the grip of panic and madness," and suggested that world leaders were considering drawing up new rules for global finance.

"We will have to come up with something. I think that we will have to rewrite the rulebooks," he said.

As European stock markets closed for the weekend on Friday, the London FTSE 100 index of leading shares fell 8.85 per cent to close at 3,932.06, its sharpest daily plunge since the 1987 stock market crash.

In Paris the CAC 40 lost 7.73 percent to finish at 3,176.49 while the Frankfurt Dax shed 7.01 percent to end the week at 4,544.31.

Other European stock markets also saw sharp drops: 7.14 per cent in Milan; 8.48 per cent in Amsterdam; and 9.14 per cent in Madrid.